Financial shock

The biggest foreign investor in Subic has collapsed under a mountain of debt, hitting the local banking system with the biggest corporate default in Philippine history.

But, to be clear, the local financial sector has gone a long way from the undercapitalized small banks of the 1980s, and reforms by monetary authorities now ensure that any monetary loss from this crisis will easily be absorbed by the banking system.

Last week, the shipbuilding unit of the financially beleaguered Korean conglomerate Hanjin Group — Hanjin Heavy Industries and Construction Philippines — sought protection from the court, asking that it be placed under receivership to stop banks from collecting on its loans.

Part of its petition is for it to be allowed to continue operations through a workable financial rehabilitation plan.

Five financial institutions — Rizal Commercial Banking Corp., Land Bank of the Philippines, Metropolitan Bank and Trust Co., Bank of the Philippine Islands, and Banco de Oro Universal Bank — have a combined loan exposure of $412 million, most of it lent without collateral. These banks have decided to move as a group to take control of Hanjin’s $1.6-billion shipyard in Subic Bay, Zambales, which employs about 23,000 workers.

It may seem to be the best course of action for local banks to protect not only their interest but, as one creditor put it, also the interest of the Philippine economy, considering the big number of Hanjin employees as well as the employees of its subcontractors in Subic and nearby areas.

As the banks lack expertise to run a shipbuilding business, they are expected to eventually sell the company to a strategic investor and recover their exposure.

The local banks have expressed confidence in the soundness of their collective stance, on the ground that the Philippine assets of Hanjin are believed to be worth a lot more than the loan exposure of the five financial institutions. RCBC has a loan exposure of $140 million to Hanjin; Landbank, $80 million; Metrobank, $72 million; BPI, $60 million, and BDO, $60 million.

One problem, however, is that the local unit of Hanjin also owes a bigger $900 million to creditors in South Korea. This will be the thorny issue in the Philippine banks’ bid to take over Hanjin’s assets in Subic. If the Korean creditors are left out of any rehabilitation deal, they can file legal action to stop it, and any plan by the local banks to work out the rehabilitation and eventual sale of Hanjin-Philippines to another investor is bound to get delayed or aborted altogether.

It would do well for the local banks to sit down as well with the other creditors of Hanjin-Philippines to agree on a unified approach to resolving the liquidity problem of the shipbuilder.

This way, it will still be possible to save the thousands of jobs at risk at the main shipbuilding facility in Subic and at the factories of the shipbuilder’s subcontractors.

This early, the Department of Trade and Industry has joined efforts to salvage the situation. Its head, Secretary Ramon Lopez, last week noted that his agency would help find a potential “white knight” or investor to ensure that Hanjin-Philippines could continue operating.

Two Chinese companies are reportedly interested in the shipbuilding facility, with its representatives coming over this month and in February to take a look.

The biggest damage arising from a failed Hanjin-Philippines rehabilitation will not be on the financial system. The Philippine banking system has some P9.7 trillion in outstanding loans, of which P260 billion are classified as bad loans.

Adding the P21-billion exposure of local banks in Hanjin-Philippines will only slightly raise the banking system’s nonperforming loan ratio.

The worst impact of a failed rehabilitation will be on the thousands of workers that will be displaced. It’s imperative, therefore, that all stakeholders work on ensuring that Hanjin-Philippines is protected from creditors seeking payment now, and that a new investor is allowed to take over its operations in Subic and continue fulfilling its backlog of ship orders.